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Friday, April 1, 2011

Consumer Bankruptcy and Household Debt

Mark Jickling
Specialist in Financial Economics

Jennifer Teefy
Information Research Specialist

The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA; P.L. 109-8) included the most significant amendments to consumer bankruptcy procedures since the 1970s. Bankruptcy reform was enacted in response to the high number of consumer bankruptcy filings, which in 2004 and 2005 reached five times the level of the early 1980s. Why did filings increase so dramatically during a period that included two of the longest economic expansions in U.S. history? Because bankruptcy is by definition a condition of excessive debt, many would expect to see a corresponding increase in the debt burden of U.S. households over the same period. However, while household debt has indeed grown, debt costs as a percentage of income have risen only moderately. What aggregate statistics do not show is that the debt burden does not fall evenly on all families. Financial distress is common among lower-income households: in 2007, 27% of families in the bottom fifth of the income distribution spent more than 40% of their income to repay debt.

Following the effective date of BAPCPA, in October 2005, there was a sharp reduction in the number of bankruptcy filings, reflecting the “rush to the courthouse” to file before the new law took effect. Since the 2006 lows, the number of filings has risen steadily. In 2009, personal bankruptcy filings reached 1.4 million, close to pre-BAPCPA levels. Unless there is a sharp postrecession reduction (which has not been the historical pattern), it appears that BAPCPA will not produce the effect its supporters hoped for—a permanent reduction in the rate of consumer bankruptcy.

With the recession that began in December 2007, the long-term upward trend in consumer indebtedness was interrupted. Since the middle of 2008, the amount of debt held by U.S. households has continued to decline for 10 consecutive quarters. In all, households have reduced their debt burden by about $707 billion, or 5.4%. Causes and implications of this trend are discussed in CRS Report R41623, Household Deleveraging: Why Is Consumer Debt Falling?, by Mark Jickling and Darryl E. Getter.

This report presents statistics on bankruptcy filings, household debt, and families in financial distress.

Date of Report: March 23, 2011
Number of Pages: 9
Order Number: RS20777
Price: $29.95

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